IJTIHAD IN THE DEVELOPMENT OF ISLAMIC BANKING
MOHAMMED ALI ELGARI
The concept of Ijtihad in the religion of Islam is vitally important. The appearance of Ijtihad in the development of Islamic banking and finance has shown that Ijtihad is a major component of Islamic legal doctrine.
In nearly all Muslim countries and communities, the Sharia is experiencing a resurgence. Muslims everywhere aspire to a life that is more Islamically cultivated. This trend is particularly noticeable in the realm of finance, banking and insurance, where calls for Islamisation are now familiar ones. Such a way of life cannot be pulled out of any vintage law book, no matter how “time-honoured” that book might be.
This is because life never remains constant. Th e celebrated works of Islamic Jurisprudence are glorious, but they were written for a different era, addressing dissimilar situations and distinct people.
The Sharia does have the flexibility to respond to change and diversity. It has its own built-in means of evolution, but no institution can thrive without responding to the contemporary needs of people. Religion is no exception. Ijtihad (expert opinion) is the soul of the Sharia and its reason for continuing revival.
Since the 4th century AH (10th AD) Muslims have lived under a “convention” that the “gate of Ijtihad is closed”. This came after the completion of the four major Schools of Fiqh (law), when Muslims thought that the annals of jurisprudence were then complete.
It led to virtual stagnation in legal research, as the function of a Sharia scholar became just the repetition of what was already in the books. It is only recently that the Muslims have felt the need to make an effort to adapt the old laws to the new circumstances.
The Meaning of Ijtihad
“Ijtihad”, in the Sharia, means a total expenditure of total effort by a qualified jurist to infer, with a degree of probability, the rule of the Sharia in a particular situation from detailed evidence, the source being the Qur’an, the Sunnah, Ijma (consensus) and qias (analogy). Ijtihad can be directed to inferring rules of the Sharia that are applicable to a prevailing situation, or to the extension of the Sharia. Th e Sharia, therefore, encompasses its own means of renovation and revitalisation.
The Limits of Ijtihad
Though it is the means of giving the Sharia resilience, Ijtihad is neither a source of anarchy and chaos, nor a means of transforming the Sharia from a divine to a man-made law. For Ijtihad is not a human source of law. While utility, custom and the general good are well taken into consideration in the process of Ijtihad, they are relevant only in as much as they lend weight to, for example, the choice of one possible analogy over another in the case of qias. Without such a limitation, the Sharia would, in time, lose its virtue and its divine character.
This proposition not only sets the limits of Ijtihad, but it also sets the limits of Sharia tolerance of interpretation of texts. On the other hand, Ijtihad does not exclude the extraction of Sharia rulings from clear, unambiguous texts.
For example, the Qur’an says that “Alms are for the poor and the needy and those employed to administer the funds; for those whose hearts are to be reconciled…” etc. (9:60). Knowing that the Zakat is to be paid to the poor, needy…etc., is not Ijtihad. But deciding that “those whose hearts are to be reconciled” were to be paid part of the Zakat in the beginning (because the Islamic state was weak in the early days of Islam), and inferring that now (at the time of the Khilafat of Omar Ibn al Khattab), their share of Zakat could be eliminated, was Ijtihad. That is what the second Khalifa, who was a great Mujtahid, did.
Ijtihad in the Words of Ibn Al-Qayyim
The following is an excerpt from Al-aam Al-Muajjah, the famous book of the great Ibn Al-qayyim concerning Ijtihad:
“Being ceaselessly set on the narrative is, always, going astray in the Sharia, and an ignorance of the intention of leading learned men. He who gives a fatwa based solely on what is narrated in the books, ignoring differences in people’s norms, habits, their era, circumstances and condition, is misguided and misguiding.
“The harm he does to religion is worse than the harm inflicted by one physician prescribing to all and everyone out of only one book of medicine. Rather, this ignorant mufti is more harmful to the body and religion of Muslims.” (Ibn Al-Qayyim p.77-78)
Present-Day Ijtihad in Islamic Banking.
In the second half of this century, and after the demise of colonialism, Muslims realised that the conventional institution of financial intermediation, which is based on a borrower/lender relationship and interest, is not in line with the Sharia. They started looking into their history and jurisprudence to find a substitute.
A model Islamic bank should be based on Mudaraba, replacing the borrower/lender relationship with a profit-and-loss-sharing arrangement to meet the needs of society and to compete with conventional banks, while still working within the boundaries of the Sharia research and a great deal of Ijtihad. In fact, the emergence of Islamic banks was a blessing to Islamisation, because it created a strong case for “opening the gate of Ijtihad”.
It is no surprise that the most significant use of Ijtihad in the present day is in the field of finance and banking. This is because Islamic banking is the most notable component of the Islamic economic system that has been brought to life in this era.
To be able to meet the challenge of modern life, while remaining within the boundaries of the Sharia, a great deal of Ijtihad was needed for Islamic banking, because the issues facing these new banking institutions had no ready-made ruling in the Sharia.
Ijtihad was needed to infer from the original sources the appropriate rules. Sharia Boards in Islamic banks and the Fiqh Academies all over the Muslim world responded to this challenge. Some examples of their conclusions are given below
1. The Promise as a Commitment in Murabaha
Although Islamic banks have to do “real” and not purely monetary transactions, their primary function is financial intermediation. Yet they are required to offer a viable and practicable substitute for conventional banking. As with any other financial intermedial^, a major concern must be to match assets with liabilities. For this reason, Islamic banks cannot actually engage in merchant-like activities, such as maintaining warehouses with a large inventory of goods and equipment, etc.
Yet they are required, from the Sharia point of view, to render financial help through the actual purchase and resale of goods and equipment. It is a rule of the Sharia that to sell anything, one must have actual possession of it first. When an Islamic bank is approached by a client who wants to buy an aeroplane, for example, the bank cannot enter into a bank sale contract unless it already owns and possesses such an aeroplane. Certainly, the client can promise that if such equipment is purchased by the bank, he will buy it (on instalment) and give a profit to the bank.
However, a promise in the Sharia is not a commitment, for if a commitment is averted then it is no longer a promise but an actual sale contract, which is not allowed at this stage.
Some contemporary scholars found that in the Maliki school, a promise becomes obligatory once the promised one finds himself in a predicament due to that promise. This Maliki position is, in fact, in the realm of benevolent contracts (gifts) and not exchange contracts (sales). The Ijtihad of these jurists was to adopt the same criteria for the contract of Murabaha, although it is a sale contract.
Once the bank buys that aeroplane, it will be in a great predicament if the client decides not to buy. Therefore, the contemporary Ijtihad is to rule that such a promise is actually a vow. Hence, if the client decides not to buy, the bank can dispose of the aeroplane by sale to the next possible buyer. If loss is incurred (other than the time value of the money), the bank will have recourse to the client. This is the essence of the ruling of the Islamic Fiqh Academy of the Organisation of Islamic Conference in Jeddah.
2. Constructive Liquidation of Mudaraba
Mudaraba is a partnership in profit, where one agent (Rab al-Maal) provides the capital and the other (Mudarib) provides labour or management skills. The two agents contract to divide the profit in whatever ratio they agree at the time of contracting.
However, it is a Sharia requirement that the apportioning of the profit can only be done after the Mudaraba is liquidated. This is because without dissolution, there is no certainty that value was actually created in excess of the original capital owned by the financier.
But because the idea of Islamic banking is based on Mudaraba, particularly on the liability side, this becomes a problem. This is because investment accounts are mostly shortterm (3, 6 or 12 months), while the assets created by the use of these funds require a longer term. Weekly, monthly, or even quarterly liquidation is not practicable and at times even impossible.
A major achievement in Ijtihad made by the Sharia Boards of many Islamic banks was that it was sufficient to do a “constructive liquidation”, via accounting procedures, and then apportion the profit based on that constructive liquidation. This made the Mudaraba a viable and practicable substitute for time deposits.
3. Reciprocal Lending
The loan contract in the Sharia is, always, for benevolent purposes. Qard-Al-Hasana (interest-free loan) is the only form of lending allowed. No interest or any compensation is allowed to be paid by the borrower to the lender.
The Sharia is very strict in this matter, to the point that to impose any conditions on the borrower is considered suspicious and generally not allowed, even if they are nonmonetary. In particular, giving a loan to someone with a condition that he gives a reciprocal one later is not allowed and is considered usurious.
4. Correspondence Banking
When Islamic banks started, they needed, among other things, to have correspondent banks all over the world. Through correspondence banking, remittances, transfers, LC’s etc., can be made.
This requires the Islamic banks opening an account and setting a credit line at each and every correspondent bank. Conventionally, such banks will earn interest on the credit and pay interest on the debit accounts. Certainly, Islamic banks can, as much as possible, maintain credit in these accounts and waive their right to earning interest. But a correspondent bank will never give “free” credit when such is needed.
Rather than earn and pay interest, the solution was to work out an arrangement whereby an Islamic bank gives up its right to earn interest on its accounts. Instead, the correspondent bank will extend credit, at no interest, for the same amount for the number of days in which the account was in credit.
This is done on the basis of daily balances. It was ruled, by more than one Fatwa body, that since the purpose of this arrangement is to avoid interest and not to earn it, then it is acceptable in certain conditions. This was one more significant example of the Ijtihad of contemporary scholars.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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